Freedom Farm

Table of Contents 1.0 Introduction...................................................................................4

1.1 MISSION STATEMENT....................................................................................................................................................4 1.2 GOALS AND OBJECTIVES................................................................................................................................................5 1.3 INDUSTRY OVERVIEW...................................................................................................................................................5

2.0 Operations Plan.............................................................................8

2.1 LOCATION..................................................................................................................................................................8 2.2 CROPS.......................................................................................................................................................................9 2.3 EQUIPMENT..............................................................................................................................................................10 2.4 YARD SITE...............................................................................................................................................................12 2.5 SEEDING EXPENSES ....................................................................................................................................................12 2.6 FERTILIZER EXPENSES.................................................................................................................................................13 2.7 CROP INSURANCE......................................................................................................................................................13 2.8 LAND TAXES............................................................................................................................................................14

3.0 The Marketing Plan......................................................................14

3.1 MARKETING INTRODUCTION..........................................................................................................................................14 3.2 MARKET ANALYSIS....................................................................................................................................................15 3.2.1 The Market .............................................................................................................................................................15 3.2.2 Competition.............................................................................................................................................................15 3.2.3 Target Market ......................................................................................................................................................16 3.3 MARKETING STRATEGY ..............................................................................................................................................16 3.3.1 Price........................................................................................................................................................................17 3.3.2 Distribution ............................................................................................................................................................17 3.3.3 Marketing Plan Budget...........................................................................................................................................17 3.3.4 S.W.O.T. Analysis - Strengths.................................................................................................................................18 3.3.5 S.W.O.T. Analysis - Weakness................................................................................................................................18 3.3.6 S.W.O.T. Analysis - Opportunity ...........................................................................................................................19 3.3.7 S.W.O.T. Analysis - Threats...................................................................................................................................19

4.0 Human Resources Plan................................................................20

4.1 MANAGER................................................................................................................................................................20 4.2 PART-TIME LABOR.....................................................................................................................................................20

5.0 Financial Plan............................................................................... 21

5.1 WORKING CAPITAL.....................................................................................................................................................21 5.2 DEBT/ EQUITY CAPITAL .............................................................................................................................................21 5.3 LONG-TERM DEBT REPAYMENT...................................................................................................................................22 5.4 OPERATING EXPENSES................................................................................................................................................22 5.5 BASE CASE SCENARIO................................................................................................................................................23 5.6 SENSITIVITY ANALYSIS................................................................................................................................................25 5.6.1 Analysis Assumptions ............................................................................................................................................25 5.6.2 Inflation Effect on Commodities............................................................................................................................26 5.6.3 Price and Yield Fluctuations..................................................................................................................................27 5.7 WORST CASE SCENARIOS............................................................................................................................................29 5.7.1 Failure of Certification..........................................................................................................................................29 5.7.2 Crop Insurance Utilization.....................................................................................................................................30 5.8 BEST CASE SCENARIO................................................................................................................................................30

6.0 Summary..................................................................................... 30

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References........................................................................................32

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List of Tables
Table 1: Organic production area (hectares) and organic production (expressed as percentage of total production area) for the 12 countries with highest organic production. ( OCIA Communicator newsletter, July to September 2001. www.ocia.org/new/members/index.asp)..............................................6 Table 2 : Organic commodity prices (Sunrise International and Marysburg Organics (Glen Neufeld).....................................................8 Table 3 : Crop rotations: year one to year three conventional, year four to seven organic production..............................................................10 . ....................................................................................................... 10 Table 4 : Equipment Purchased.........................................................10 Table 5 : Seeding rate and seed price (Holland, Ernie, 2001) ............12 Table 6 : Fertilizer and inoculant rate, price and cost (Saskatchewan Agriculture and Food; Microbio-Rhizogen, Saskatoon; and Cargill, 2001)................................................................................................. 13 Table 7: Equity/Debt Financing..........................................................21 Table 8 : Debt repayment structure of a loan at an interest rate of 8% with varying amortization periods......................................................22 Table 9 : Operating expenses and interest per total sales.................22 Table 10: Summary of income statement, as of December 31...........23 Table 11 : Year 1 and year 10 balance sheet as of December 31 ......25 Table 12 : Base case NPV and IRR on Equity Investment...................25 Table 13 : Net Income and year end cash at 100% of expected yield and 100% of expected price (Base Case)...........................................26 Table 14 : Net income and year end cash at 90% of expected yield and 100% of expected price.....................................................................26

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Table 15 : Net income and year end cash at 100% of expected yield and 90% of expected price................................................................26 Table 16 : NPV and IRR with no growth in organic selling prices........26 Table 17 : Internal rate of return from fluctuating yields and organic commodity prices..............................................................................27 Table 18 : Net income and year end cash pending continued certification failure............................................................................. 29 Table 19: 10 year NPV of equity investment and IRR pending organic certification on year shown................................................................29

List of Figures
Figure 1 : Saskatchewan Soil Zones ....................................................9

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1.0 Introduction
Consumers in North America and Europe are showing an increasing desire for organic food. Organic farming in Canada, and Saskatchewan in particular, has steadily increased. The greatest expansion in the market has happened only in the last decade. Reasons for the increase in organic food production are as follows: organic food production currently commands a market premium of 2 to 2.5 times the

conventional market price. the sector of consumers willing to pay the higher prices demanded by organic food is

increasing. consumers desiring organic produce reside in Canada, USA, and Europe - all traditional

marketing areas for Saskatchewan grain. lower input prices to produce food at the farm gate because no synthetic fertilizers and

costly chemical sprays are used.

1.1 Mission Statement

Saskatchewan has a substantial crop production land base. With low commodity prices, organic farming is becoming a sustainable option. The overall objective of the business is to establish a viable organic grain/oilseed/pulse operation and increase cash flow on 1680 cultivated acres per year. The mission statement is to provide quality organic produce to suit customer demand while maintaining soil fertility and crop productivity. Freedom farm intends to achieve this by having all of its land in organic production in four years, and have pre-determined organic buyers for greater than 60% of its average production before harvest of the fourth year begins.

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1.2 Goals and objectives

Goal: to build a viable organic farm business in ten years. To establish the first three years of organic farming practice while selling on the

conventional market until OCIA certification. To have all land in organic production within four years and sell on the organic market

by the fourth year. To increase cash flow over the next seven years through organic practice while selling on

the organic market. To replace and improve farm power machinery in ten years. To maintain soil fertility while maintaining yield productivity and year to year stability.

1.3 Industry Overview

The worldwide market is reported to be $20 billion US (OCIA website, 2001). The greatest market share is in Europe, USA, and Japan. In these nations people have increasing concerns about health and environment, making organic food a natural solution. These nations have aggressive promotion and supportive government policies to address the desire for greater organic food consumption (OCIA Communicator, July 2001). As of 2001, according to the organic creditation association OCIA (Organic Crop Improvement Association), Australia and Argentina head the organic thrust with 7.7 and 3 million hectares, respectively. For Australia and Argentina organic production accounts for about 1.7% of those countries' production area. Europe has the largest organic production area when assessed a percentage of total area under production (Italy at 6.5% and 0.9 million hectares; Austria at 8.4% and 0.14 million hectares; Finland at 6.8% and 0.28 million hectares). Canada has 0.19 million hectares, which represents only 0.25% of the production area.

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Table 1: Organic production area (hectares) and organic production (expressed as percentage of total production area) for the 12 countries with highest organic production. ( OCIA Communicator newsletter, July to September 2001. www.ocia.org/new/members/index.asp) .
Country Australia Argentina Italy USA Germany United Kingdom Austria Hectares % of total production area 7,654,924 1.62 3,000,000 1.77 958,687 6.46 900,000 0.22 452,279 2.64 380,000 2.4 287,900 8.43

Canada
Sweden Finland Denmark

188,195
174,000 147,423 146,685

0.25
5.6 6.79 5.46

This market has been helped by an explosive annual growth of at least 20% per year in the last decade (USDA, 1997). By 2010, Canada will stake a claim of between 5 to 10% in the global markets. Canada is already a net exporter of bulk organic grains and oilseeds, and a significant producer of raw products. However, even within Canada, demand for organic products is so great that about 80% of organic store products are currently imported from the USA. Saskatchewan has 70% of the total of all Western Canadian organic producers (Agriculture and Food data base links). The organic food industry accounts for $30 million annual sales in Saskatchewan alone. Within this province, at least 30 organic food processors are represented in flour, flax oil, oatmeal, bread, cereals, bakery mixes, baby food ingredients, whole and split peas. Examples of private companies in the processing sector are Popowich Milling (Yorkton), Bioriginal Food and Science Corp. (Melville), CSP Foods (e.g. Saskatoon), Proven Organics (Gravelbourg), Sunrise International (Saskatoon), Marysburg Organic, Infraready (Saskatoon) and Farmgro Organic Foods (Regina).

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The organic producers registered in Saskatchewan are with four organic certification bodies. These are Canadian Organic Certification Cooperative (COCC); Pro-Cert Organic Systems; Saskatchewan Organic Certification Association Inc. (SOCA); and Organic Crop Improvement Association (OCIA). These are all under the umbrella organization Saskatchewan Organic Directorate (SOD), which supports organic farming and disseminates information to growers. Competition appears minimal due to the relative infancy of the organic industry. Market expansion will surely benefit Saskatchewan growers for the global market, but retail within Saskatchewan may be limited due to the small population base. Benefits of gaining certification with an international organic body, such as OCIA are numerous. OCIA is chiefly a body operating within the USA and the biggest advantage for a Saskatchewan producer would be the proximity to and rapid expansion of the US organic market. Organic products would automatically benefit from OCIA marketing. Gaining certification with OCIA requires $200 per year. A 3-year pesticide and synthetic fertilizer free period, crop and record inspection are mandatory for certification. After three years, selling product under OCIA regulations has a cost in that OCIA receives 1% of gross sales. Market opportunities for organic food are assisted by the proximity of the USA market in addition to the expanding Canadian market. European markets are also accessible through the organic food processors - and selling product in Europe may net good premiums of up to three times the conventional price. Alternatively, an organic producer always has the option of selling on the conventional market when excellent prices are available for specific commodities or market classes. Typically, a survey of processing markets by The Canada Thistle (Vol. 1, no. 3, 2001) shows that for most organic commodities, a producer can obtain between two and three times the conventional market price. Such market premiums are deemed necessary to compensate for the lower yields, which result from organic farming practices. Price ranges, recently quoted by a marketer for both Sunrise

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International and Marysburg Organics (Glen Neufeld) in early November 2001 are indicated below in table 2.

Table 2 : Organic commodity prices (Sunrise International and Marysburg Organics (Glen Neufeld) Commodity Malting barley Wheat CWRS Wheat durum Oat food Canola Pea yellow or green Flax Organic price range $/bu 5.5 to 7.5 7 to 11 7 to 11 7.5 to 10 13 6.5 to 8 14 to 17 Notes Average of 6.5 used Average of 9 used No scheduled production Average of 6.75 Average of 13 Average of 7.25 Average of 15.5

2.0 Operations Plan 2.1 Location

Freedom Farm will be located in the SouthEast corner of Saskatchewan just north of Kipling. This area is well suited for farming due to precipitation, temperature, the soil classification and frostfree days. The average precipitation received is 427 mm, which is adequate for the crops grown on this farm, and drought is not likely to be a problem in this area (Saskatchewan Agriculture and Food, 2001). Kipling is in the black soil classification zone. The black soil zone is known to obtain the highest yields of cereals and oilseeds (University of Saskatchewan, 1984). The temperature in this zone also consists

of 1600 growing degree days over 5o Celsius. A figure showing the Saskatchewan Soil Zones is seen below in Figure 1.0. Growing degree days need to be above 1500 to be suitable for the alfalfa in our crop rotation (Saskatchewan Agriculture and Food, 2001). The number of frost free days is approximately 120 which is satisfactory for the crops grown on Freedom Farms (Saskatchewan Agriculture and Food, 1999). The cold winter climate of Saskatchewan also keeps insect and fungal pests to a minimum level because many of them can not survive the harsh temperatures that occur through the winter months (Saskatchewan Agriculture and Food, 2001).

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Figure 1 : Saskatchewan Soil Zones A parcel of land consisting of twelve-quarter sections will be purchased (1920 total, 1680 cultivated acres). Lane Realty Corporation has 825 acres of land for sale in the Kipling area that will be purchased for Freedom Farm. The yard site is located on the NE 4-14-6 W2. This land parcel is selling for $225,002 which includes some grain storage. Therefore, the total cost of this land will be $215,202 when the storage (value of $9,800) is subtracted. Additional land in close proximity of the yard site will have to be purchased to bring the total cultivated acres to 1680. This land brings the total value of all cultivated land purchased to be $432,177.

2.2 Crops
The crops that will be grown on Freedom Farm will be wheat, peas, oats, canola, flax and alfalfa. The land will be divided into seven equal parcels, which will be used to rotate the crops as seen in Table 3.0. In the first three years of production the crops will be grown for the conventional market.

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This 3-year period is required by the organic certifying agencies in order to ensure that the product sold in the fourth year is organic. In the fourth year, all of our product will be sold on the organic market.

Table 3 : Crop rotations: year one to year three conventional, year four to seven organic production .

Block Year
1 2 3 4 5 6 7

Oat+A Canola Flax Flax Wheat Pea Wheat

Alfalfa Fallow Flax Canola Pea Wheat Oat+A

Fallow C/flax Barley Pea Wheat Oat+A A

Flax Barley Pea Wheat Oat+A A Fallow

Barley Pea Wheat Oat+A A Fallow C/flax

Pea Wheat Oat+A A Fallow C/flax Barley

Wheat Oat+A A Fallow C/flax Barley Pea

2.3 Equipment
There are several pieces of equipment required to grow the crops chosen for Freedom farm. Equipment includes tractors, cultivator, seeder, harrows, rod weeder, tandom disc, rock picker, swather, combine, grain trucks, auger, and shop tools. The majority of the equipment will be purchased used at the approximate prices indicated in Table 4 below. Table 4 : Equipment Purchased

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Powered Equipment Tractors 1) 2) Swather Grain Trucks 1) 2) Combine

Description 835 Versatile (200hp) 1086 International (130hp) 4400 Versatile 25 ft double swath

Model year 1984 1980

Purchase Price 35,000 20,000 7,000 9,000 3,000 62,000 136000

3 Ton GMC 1978 3 Ton Dodge 1972 8820 John Deere with 2 headers Total Powered Equipment 731 Morris 37 ft with tine harrows 7200 Hoe Drill 28 ft 85-50 Flex-coil 60 ft harrow draw bar B 336 Morris 36 ft 230 John Deere 24 ft Farm King 10 in 50 ft swing auger Roc-o-matic Total Non-Powered Equipment Total Equipment

Non-Powered Equipment Cultivator Seeder Harrows Rod Weeder Tandom Disc Auger Rock Picker Shop Tools

5,000 5,800 3,000 800 5,000 2,750 1,000 6,000 29350 165,350

The cultivator and rod weeder will be used to decrease weeds through spring or fall tillage and summerfallow. The rock picker is used to remove rocks aiding in field preparation. The seeder is used to plant the crop in the spring. The harrow bar allows broadleaf weeds to be removed from cereals after crop emergence. Because green manure will be used for a nutrient addition, the tandom disc is required to plow alfalfa into the soil. Finally, the swather, combine, grain truck, and auger will be used to harvest the crop and place it in the storage bins.

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2.4 Yard Site

The yard site will consist of the machine shop and the grain storage bins. The machine shop will be 50 x 50 feet in size, 16 feet high, have one walk-in door and one overhead door and a cement floor. The total cost to build the shop is $30,300 before taxes. The yard site that will be purchased from Lane Realty has some storage included with the land. However, additional storage will be required to store all of the harvest. In total, 26,000 bushels of storage will be required which should cost us approximately $1.00 per bushel for flat-bottomed bins, for a total expense of $26,000.

2.5 Seeding Expenses

Seed purchases will be based on the seeding rate, seed price, and whether seed needs to be purchased each year. As per the current regulations, non-organically grown seed can be planted and used to grow crops sold on the organic market. Another advantage is that the certified non-organic seed does not need to be purchased every year to meet the organic requirements (OCIA, 2001). Given these current regulations, seed will be purchased annually for all crops because of the difference between the price of buying certified seed and the selling price of the organic commodities. It is most feasible to sell all of the organic grain at the organic market value, which is higher than the cost of new seed, and purchase new seed for the whole seeded acreage. The only exception to this plan is in the second two years of production when the grain will be sold at conventional market prices, which are lower than the cost of new seed. For these two crop years the cereal crops will be reseeded with binrun seed. The seeding rate and the seed price is given below in Table 4. Table 5 : Seeding rate and seed price (Holland, Ernie, 2001) Seeding rate (lbs/ac) Seed Price($/bu)

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Wheat Barley Oats Flax Peas Canola Alfalfa

90.0 78.0 102.0 37.5 165.0 5.5 9.0

7.25 5.75 5.50 10.50 8.50 2.00 5.00

2.6 Fertilizer Expenses

The fertilizer expenses are calculated based on the rate of application and the price indicated below in the following table. The total fertilizer cost is calculated as dollars per acre, which can then be applied to the total acres of each crop to determine the total fertilizer cost.

Table 6 : Fertilizer and inoculant rate, price and cost (Saskatchewan Agriculture and Food; MicrobioRhizogen, Saskatoon; and Cargill, 2001) Fertilizer Rates (kg/ac) Fertilizer Prices ($/kg) Fertilizer Cost ($/ac) Phosphate 114.00 0.15 17.10 Pea inoculant 2.26 3.87 8.75 Alfalfa inoculant 2.26 3.88 8.77 Sulfur (2 apps total:) 10.20 0.40 4.08

2.7 Crop Insurance

Crop insurance rates were calculated using the average values and rates obtained for the organic crop industry by the Saskatchewan Crop Insurance Corporation. These rates cover for 70% of the industry yield average, which are also the yield values used for the calculation of total crop production. The rates for organic crop insurance are approximately 150% of those for non-organic production.

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2.8 Land Taxes

The average land tax for the 12 quarter sections purchased was used for the calculation of the land taxes. This value was used as it accurately reflects the tax cost for the land purchased as well as it will accurately reflect the tax rate on any land purchased in the future.

3.0 The Marketing Plan 3.1 Marketing Introduction

Freedom Farm will be growing and marketing organic grain governed by the OCIA. Grain will be marketed and sold directly from the on-farm storage. The first three years of production will be sold with conventional prices because it takes three years to convert to organic farming. The grains that will be grown are wheat, barley, oats, flax, peas, alfalfa and canola. Alfalfa is the only crop grown that is not sold because we will use it as green manure. After three years of operating, the grains and canola will be grown as certified organic production. The marketing plan for Freedom Farm has two different sections starting with the market analysis and then the marketing strategy. The market analysis is broken into three segments: Market Competition Target Market

The marketing strategy is then composed of four sections: Price Distribution Marketing planning budget Strengths, Weaknesses, Opportunities, Threats (S.W.O.T.)

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3.2 Market Analysis

3.2.1 The Market The world market of organic foods is flourishing with the majority of the buying and producing coming from Europe, Japan and the USA. The US market is worth over $20 billion annually and with the increasing health and environmental concerns the market is growing (OCIA, 2001). The world market is being supported by government policies through aggressive promotions of organic products. The Canadian market annually ranges from $70-200 million in sales and has a growth of 15-25% per year (OCIA, May 2001). Even with the annual increases, the organic industry is still only at 1% of the total food sales. Canada is a net exporter of bulk organic grains and oilseeds, but at this time 80% of food products are brought in from the USA (Saskatchewan Agriculture and Food, 2001). This market could potentially be taken over by Canadian produced foods. The market in Saskatchewan consists of over 1000 certified producers, which amounts to 70% of western Canada producers. Saskatchewan is a $30 million dollar industry and increasing. There are over 30 organic processors in Saskatchewan; they produce products such as flour, flax oil, oatmeal, bread, cereal and many other products (Saskatchewan Agriculture and Food, 2001). One of the processors in Saskatchewan is Popowich Milling in Yorkton. Popowich Milling processes oats and produces flour, oatmeal and other foods. Another processor is Bioriginal Food & Science Corp, Melville Sask., which processes edible oils and flaxseed. CSP foods in Saskatoon, processes bakery mixes, and Proven Organics in Gravelbourg Sask, processes whole and split peas, flax and hulled barley.

3.2.2 Competition Competition within Saskatchewan is growing and at first glance, the increased local competition may seem detrimental to the Saskatchewan industry. But with the increasing producers comes an

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increase in the amount of organically produced commodities that are exported from Saskatchewan. As a result the increase in Saskatchewan producers may actually benefit the Saskatchewan industry by making the province more of a player in the North American and even global organic marketplace. Competition is, however, quite minimal in Canada because of the infancy of the industry, leaving substantial room for future expansion in the production and processing of the organic commodities. Contacting many buyers to gain the highest price for the grain will be extremely important in order to maximize profits and meet our objectives. Competition for exporting organic commodities varies from country to country, and greatly depends on the age of the particular countrys organic industry and its past performance. As mentioned previously, OCIA certification will be sought which will help immensely when competing because of its extremely respected global reputation.

3.2.3 Target Market The target market is situated all over the world starting with the market in Saskatchewan, with the above cited sales outlets. Other target markets that will be focussed on are in the US and European countries. The marketing will be done by contacting buyers and selling to the highest bidder. Grains that are grown on the farm will be sold straight from the farmyard to the buyer.

3.3 Marketing Strategy

In order to market organic crops they must meet the requirements for organic produce as outlined by the governing body, OCIA. The objective is to have all of Freedom Farms land in OCIA recognized organic production in four years, and have pre-determined organic buyers for greater than 60% of our average production before harvest of the fourth year begins.

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3.3.1 Price Organic producers are Price Takers, the price that is received for the crop depends on the price that is received for the product all over the world therefore searching for buyers will be extremely important. The demand, along with the market is what determines the price received for the grain. The quality and volume of the crop that the producer has to sell affect pricing. Quality is extremely important when marketing the crop; the highest price will be obtained if the quality is grade one. One of Freedom Farms goals is to have 40% of production contracted before harvesting. With larger amounts of grain to sell, buyers will be more interested.

3.3.2 Distribution Distribution will follow one method. Product is distributed from the farmyard, where a trucking company will come, load the crop and take it to the buyers facilities. The distribution costs are the responsibility of the buyer as all the crop is priced at the farmgate.

3.3.3 Marketing Plan Budget The Marketing plan budget consists of using the phone, Internet, occasional trips to processors and trade shows or conferences. Phone marketing will be very important when it comes time to sell the crops because all the buyers will be located by phone. Another way of marketing is through the Internet. The internet gives Freedom Farm the means of locating prices and buyers all over the world. The prices may very from country to country and the highest price can be obtained this way. New buyers that are advertising on the Internet will be discovered and contacted if need be. Occasional trips to processors will keep Freedom Farm in contact with the buyers, and will help it keep in contact with what is occurring with the business and also what the market is doing. The relationship between the processor and the farm will be improved and maintained by the visits. By attending trade shows and

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conferences, not only will Freedom Farms knowledge of the market increase but it can also locate new potential buyers. Knowledge of Freedom Farm will be spread with respect to the general public and other businesses in the organic arena.

3.3.4 S.W.O.T. Analysis - Strengths Freedom Farm has strengths starting with the sole proprietorship form of business organization. Freedom Farm requires the proprietor to be an educated person with business knowledge so it will be operated efficiently and marketing will be successful. The part-time employee will also be educated because he/she will have an agricultural background. This employee will help in operating the farm efficiently. The product produced is a great strength to the farm because it is a healthy product; healthy foods in the market are becoming more important to consumers because of the alleged health problems of non-organically grown foods, such as Genetically Modified Foods (GMF). The farm has unlimited production diversity when it comes to producing grain, pulses or oilseeds. The farm can grow the crops that have the highest price projected on the current market.

3.3.5 S.W.O.T. Analysis - Weakness One weakness is that the organic farm is just starting from scratch. Although the farmer has farming education he/she is still starting from the beginning and there may be learning curves that are costly at times due to inexperience with this form of production. Starting a business in the agriculture industry requires significant capital. In the new industry of organic farming, there is a limited database on production practices and outcomes. Organic farmers also have a great challenge when it comes marketing their products.

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3.3.6 S.W.O.T. Analysis - Opportunity The opportunity for organic markets to grow globally is just starting, and as populations grow, the need for naturally grown food expands. Global markets are growing each year and there are tremendous opportunities to market products in these areas in the future. As opportunity grows worldwide, it is also growing locally and at this time there are over 30 organic processors in the province of Saskatchewan (Saskatchewan Agriculture and Food, 2001). It is very important that the governing body be recognized when it comes to selling the grain, and with OCIA, crops can be sold globally. Organic farming has allowed smaller farms to compete on the market by increasing their income. There have been reduced production costs because of no pesticides and no artificial fertilizers, all of which are expensive inputs. These are all opportunities that will increase Freedom Farms chances of success.

3.3.7 S.W.O.T. Analysis - Threats A threat to organic farming is the infancy of the industry. The industry is still developing so it is difficult to see know whether the market for the product will be strong in the future. Another concern is nutrient mining of the soil. Freedom Farm anticipates a challenge to replenish the soil with practices such as green manure and applying rock phosphate. The market could deplete because of excess supply if there is an expansion of Saskatchewan producers. This could be a threat because of competition or it could be an opportunity because the farmers could sell their crops together and market to the larger buyers. Increased government regulation may be a threat in the future. Retaining the highest value for crops that are produced is extremely challenging because of one simple fact, organic farmers are price takers. Finally, the realization that farming is at the mercy of nature is always a threat.

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4.0 Human Resources Plan 4.1 Manager

The sole proprietor will be responsible for the majority of the duties required by the business, such as operating, marketing and human resources. He / she will organize, train, direct and coordinate the activities of the casual labor. The manager will be paid based on an hourly wage that will start at $20/hr. The compensation will also be based on an average of 1 hour per acre of cultivated land (1680 ac) and 400 hours per year of marketing (Schoney, 1995). These values accurately compensate the owner for all aspects of the operation. However the compensation will not be paid until the fifth year of production, as the cash flow in the first four years cannot support an annual outflow of over $40 000. During these first years the owner/operator will have to rely on other sources of income for personal use. The annual compensation for year 5 will be $41,600, increasing at the inflation rate of 2% per annum. The successful owner will be a well educated with a degree or diploma from a university or technology school.

4.2 Part-time Labor

The hired part-time help will consist of 1 employee and will be hired for approximately 200 hours in the spring and 200 hours in the fall. The part-time labor will be educated help, students from the University of Saskatchewan, either in the agriculture degree or diploma program or persons with farming experience from the Kipling area. The part-time labor will carry out the seeding duties; remove weeds from the fields if needed (roguing), summer fallowing, harvesting and any other duties. The hourly wage will be $9.51/hr and will work an average of 40-60 hours a week. The part-time labor will be paid as custom labor, i.e. no deductions will be paid and it is their responsibility to cover their income tax calculations.

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5.0 Financial Plan 5.1 Working Capital

The accounts receivable were calculated using an inventory turnover of 2 times annually which is an average inventory of 183 days. This equates to selling half of the years production in the year produced and holding half to be sold in the following year. The farms inventory turnover and average days may be changed once into crop production due to fluctuations in price and yield, and in order to properly allocate revenues to cover the costs of production.

5.2 Debt/ Equity Capital

Funding for start-up of the organic farm will come from two sources in relatively equal amounts. The owner will be entering the business with $375,000 of owner equity investment. The other $350,000 will be borrowed from Farm Credit Canada at an interest rate of 8%, with a constant payment amount paid amortized annually over 10 years. The annual loan payments will be in the amount of $52,160 and will be paid on November 1st of each year. It should not be a problem borrowing money because the land is collateral for the bank and land does not depreciate, but holds its value. However additional sources of collateral may be needed if requested by the lender.

Table 7: Equity/Debt Financing

$ Financed Proportion Equity Financing 375,000 52% Debt Financing 350,000 48% Total 725,000 100%

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5.3 Long-Term Debt Repayment

The financial position of the company can be changed if the debt is restructured over a longer period of time, perhaps 15 or 20 years. Negotiating the loan over a longer period of time will cause more interest to be paid in total, but will lower the annual total payments.

Table 8 : Debt repayment structure of a loan at an interest rate of 8% with varying amortization periods.
Principle Repaid Total Interest Paid Payment Amount 5 Years 350,000 88,299 87,660 10 Years 350,000 171,603 52,160 15 Years 350,000 263,355 40,890 20 Years 350,000 362,965 35,648 25 Years 350,000 469,689 32,788

The ten-year period is an acceptable length of time to repay the loan of $350,000. This is because it is feasible to do so in the financial model, and also that if the plan is successful, 10 years in business would be an acceptable time to expand by purchasing more land. Also when extending the loan over a longer period of time, such as 25 years, the amount of interest paid on the loan would exceed the amount of the principle initially borrowed. This may be advantageous for some businesses, but in our case our best interest is to repay the borrowed funds within 10 years.

5.4 Operating Expenses

Operating expenses are an extremely high percentage of the total sales in the first three years of production as the crops are being sold on the non-organic market. However, the operating expense percentage declines drastically when the organic market can be utilized because of the increase in revenue. Subsequently, with the dramatic increase in sales also comes a decrease in the interest paid in comparison to total sales. This is also expected due to sales revenue increasing by more than two times.

Table 9 : Operating expenses and interest per total sales

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Total Operating Expense/Sales Interest Expense/Sales

2002 105.0% 18.0%

2004 107.6% 19.3%

2006 59.7% 6.4%

2008 56.4% 4.4%

2010 53.5% 2.3%

5.5 Base Case Scenario

Crop prices will increase at the same rate as annual inflation, which is 2%. Yearly production values will be those of the average yields in Saskatchewan for organic producers (Sask. Ag and Food, 2001). All variable cost were calculated using the Saskatchewan Agriculture and Food 2000 Custom Rate and Rental Guide. No substantial increase in the value of organic commodities (except for inflation) and no increase in the yield of our crops were calculated. When using all the average values as previous stated, the base financial plan that would accurately portray Freedom Farm.

Table 10: Summary of income statement, as of December 31

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2002 Sales Revenue: Grain Sales Total Revenue Expenses: Seed Purchases Fertilizer Crop Insurance OCIA Fees Variable Machinery Cost Custom Labor Property Taxes Telephone Owner Labour/Management Administrative Start-up Costs Interest LT Debt CCA Expense Total Expenses Net Income Begining Retained Earnings Net Income(Loss) End Retained Earnings 155,341 155,341

2004 124,467 124,467

2006 302,741 302,741

2008 314,972 314,972

2010 327,697 327,697

20,828 33,766 4,586 350 26,311 3,804 6,600 1,478 3,500 10,000 28,000 23,855 163,078 (7,737) (7,737) (7,737)

9,229 26,742 3,232 364 23,622 3,958 6,867 1,538 3,641 23,980 30,802 133,974 (9,507) (38,941) (9,507) (48,448)

17,818 27,823 3,371 3,406 24,576 4,118 7,144 1,600 42,432 3,789 19,290 26,100 181,466 121,276 66,909 121,276 188,185

18,538 28,947 3,507 3,544 25,569 4,284 7,433 1,665 44,146 3,942 13,821 23,206 178,600 136,372 319,906 136,372 456,278

19,287 30,116 3,649 3,687 26,602 4,457 7,733 1,732 45,930 4,101 7,441 21,361 176,095 151,602 595,846 151,602 747,449

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Table 11 : Year 1 and year 10 balance sheet as of December 31

Assets Current Assets: Cash Accounts Receivable Inventory Total Current Assets Fixed Assets Land, Equipment, Buildings Accumulated C.C.A. Net Plant and Equipment Total Assets 2002 23,206 5,958 77,670 106,835 2011 573,426 12,821 203,336 789,583 Liabilities Current Liabilities: Accounts Payable Long Term Debt Total Liabilities Shareholders' Equity Share Capital Retained Earnings Total Shareholder's Equity Total Liabilities and Shareholder's Equity 2002 13,404 325,840 339,243 2011 14,478 0 14,478

623,527 (23,855) 599,672 706,507

817,766 (266,385) 551,381 1,340,963

375,000 375,000 (7,737) 951,486 367,263 1,326,486 706,507 1,340,963

The IRR of 12.2% is slightly lower than our required return on equity that was set at 15%. Risk in this business is very high, and the possibility of trending to worse case scenarios is greater than the possibility of having best case scenarios over the long run.

Table 12 : Base case NPV and IRR on Equity Investment

Net Present Value of Equity Investment Internal Rate of Return on Equity Investment (72,049) 12.2%

A complete projected balance sheet, cash flow statement and income statement and their supporting schedules can be found in Appendix 1.

5.6 Sensitivity Analysis

5.6.1 Analysis Assumptions The two most important determining factors that affect the revenue of our business are factors beyond our control - commodity price and crop yield. When conducting the analysis of price and yield fluctuations, we assumed that Freedom Farm successfully operated to 2005 (the first year of organic
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production) while maintaining price and yield levels at those of the current market and industry average. This is critical because a drop in yield or price to 90% of expected will be detrimental, even if the opposite factor stays at 100%.

Table 13 : Net Income and year end cash at 100% of expected yield and 100% of expected price (Base Case)
Net Income Cash 2002 (7,737) 23,206 2003 (31,204) 15,929 2004 (9,507) 3,392

Table 14 : Net income and year end cash at 90% of expected yield and 100% of expected price
Net Income Cash 2002 (23,271) 16,035 2003 (42,965) (3,760) 2004 (21,954) (28,301)

Table 15 : Net income and year end cash at 100% of expected yield and 90% of expected price
Net Income Cash 2002 (23,271) 16,035 2003 (42,427) (3,266) 2004 (21,273) (27,138)

A short term operating loan could be utilized to cover the negative cash levels, but this is another complicating factor thus the assumption of 100% yield and price in the first three years of non-organic production.

5.6.2 Inflation Effect on Commodities Commodity prices were projected to increase steadily at 2% per year, which is also the inflation rate. However, organic prices may not increase over time and may stay relatively constant. Table 16 : NPV and IRR with no growth in organic selling prices
Net Present Value of Equity Investment Internal Rate of Return on Equity Investment (114,221) 10.4%

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The above table shows when no increase in selling prices occurs, the NPV and IRR of equity investment will be lower than that of the base model. Market projections must be accurate in seeing a 2% increase per year, or else the IRR will drop to 10.4% from the base case of 12.2%.

5.6.3 Price and Yield Fluctuations Being a primary producer, Freedom Farm is faced with the problem of being a very small entity in the marketplace and therefore forces the business to be a price taker. It will have no control over the volatility of the worldwide organic market and the market could increase premiums in the case of higher demand. Conversely, the organic market could collapse due to contamination problems or a decrease in consumer preference for organic products, and prices received for organic commodities would be at the level of the non-organic market. This would be extremely detrimental as the production of potential organic crop results in lower yields and higher dockage levels than those that are non-organically produced because of lack or fertility and weed control. The first three years of crop price and yield were not fluctuated when deriving the following table, as they are at the non-organic price. Table 17 : Internal rate of return from fluctuating yields and organic commodity prices
60% -100% -100% -100% -4.3% 1.7% 6.7% Yield (% of Expected Average) 75% 90% 100% -100% -100% -100% -100% -100% -4.3% -4.3% 1.7% 5.1% 3.0% 8.9% 12.2% 8.9% 14.6% 17.9% 13.8% 19.4% 22.6% 110% -100% -1.2% 8.2% 15.2% 20.8% 25.5% 125% -100% 3.0% 12.2% 19.2% 24.7% 29.3%

40% 60% 80% 100% 120% 140%

Pe rce nt of Expe cte d Organic Price

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An exact value of the difference between organic prices and non-organic prices is not possible as the price difference depends on the crop, but the premium will range from 150% to 300%, averaging around 200%. Total collapse of the organic market price to the level of the traditional market would result in a 40% to 60% value of expected organic prices. If this were to happen the business would

become completely unviable, as the IRR would fall to a negative or 100% level. This would mean that continuing in production would be mean certain loss of equity and failure of the business, and any funds invested in Freedom Farm would most certainly be unrecoverable and lost. The difference between organic and non-organic prices also depends on the current market and will vary from year to year. When referring to the table above, the region to the upper left of the graph is an area where the IRR is extremely low, and in fact in some cases is negative or 100%. This means that the money invested in the farm is decreasing in value, earning negative returns, and the business will definitely fail. Positive, yet low IRR values show that the farm is returning the money invested in equity, but at lower values than desired. Yields of less than 60% and prices less than 40% of expected must be avoided at all costs, as incurring either of these factors will mean certain failure of the business. Shown in the center region are IRR values that range from 0% to 10% and could possibly be areas where the farm could be sustainable. However changes would have to be made when operating in these lower IRR values, such as lowering costs and expenses in order to raise the IRR to a level over 10%. The IRR of 12.2% shown in the lower-right region is located at 100% of both yield and price. This is the IRR of the base plan. The remaining values in this region of the table shows IRR values of greater than or equal to 12.2%, the IRR of the base plan. If production levels can be increased and sustained at these levels the risk of the business will be compensated by the acceptable IRR of greater than 10%.

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5.7 Worst Case Scenarios

5.7.1 Failure of Certification The entire business plan relies on the fact that we will gain certification for the fourth year of production. This is an attainable goal, but a single failed inspection or any other complicating factors could delay the certification into later years. If this were to happen it would result in a low net income and a constant decrease in cash over the life span of the farm. Table 18 : Net income and year end cash pending continued certification failure.
Net Income Cash 2005 (24,142) (47,689) 2006 (62,614) (164,436) 2007 (55,846) (236,032) 2009 (55,577) (444,274) 2011 (45,840) (639,865)

If certification is delayed past the fourth year of production, it will also have an impact on the NPV and IRR of the first 10 years. The following table shows this effect depending on the year of organic certification. The year shown is the first year that the crops are sold at the organic premium.

Table 19: 10 year NPV of equity investment and IRR pending organic certification on year shown.
NPV of Equity Investment IRR 2005 (72,049) 12.2% 2006 (166,782) 8.7% 2007 (250,807) 5.5% 2009 (391,434) -1.0% 2011 (502,064) -100.0%

This clearly reinforces the fact that organic certification is key if this business is to have any hope of succeeding. The delaying of additional capital purchases could compensate the repercussions of failed certification. Examples include the shop in 2005 or machinery replacement in future years. However taking this action would be detrimental to the efficiency and productivity of the farm, and should be avoided if at all possible.

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5.7.2 Crop Insurance Utilization Good management can only give the potential for high yields because the most determining factor affecting yield is the environment and growing season conditions. In any given year, yields can be drastically reduced due to inclement weather, hail, drought, insect damage or any other naturally occurring event. As we are currently paying crop insurance that has a coverage rate of 70% of the industry average, we can assume a worst case scenario of the yields dropping to 70% of our average production.

5.8 Best Case Scenario

As with any farm, increasing crop prices and yields will benefit the overall productivity of the farm. Producing more than the average production values can be quite possible after producing organically for a few seasons. As the producer becomes experienced in the factors affecting crop production, improvement can be made on past experiences. In the best case scenario revenue can be increased by either an increase in production, increase in commodity prices, or the simultaneous occurrence of both.

6.0 Summary
The success of Freedom Farm as outlined in the business plan would depend largely on a few factors. Such factors would include the successful organic certification for the fourth year of production, maintaining the industry average yields for organic crops and receiving the premium prices expected. Failure of one or a combination of these factors would mean certain failure for the business. An angle that was not addressed in this business plan would be to diversify an existing traditional grain farm into organic production over a number of years. This approach would seem more logical as the owner would have previous experience in the farming industry. However, if the individual that is

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investing their equity is confident that all the criteria can be met and continually achieved, Freedom Farm would be a successful endeavor when started up on its own.

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References Neil Kramer Auction Sales Ltd. 2001. On-line. Internet. 1 Dec 2001. Available: www.kramerauction.ca Nelsons Auction Service. 2001. On-line. Internet. 1 Dec 2001. Available: www.nelsonsauction.com Lane Realty Corporation. 2001. On-line. Internet. 1 Dec 2001. Available: www.lanerealtycrop.com Organic Crop Improvement Association. Communicator Organic Crop Improvement Association International Newsletter. July, August, September, 2001. On-line. Internet. 1 Dec 2001. Available: http://www.ocia.org/new/members/index.asp OCIA website. www.ocia.org. September, 2001. Saskatchewan Agriculture and Food. Varieties of Grain Crops 2001 - Crop Production Areas. 2001. On-line. Internet. 1 Dec. 2001. Available: http://www.agr.gov.sk.ca/DOCS/crops/var2001.pdf Saskatchewan Agriculture and Food. Agricultural Statistics Fact Sheet. Statistics Branch. Regina, Saskatchewan. June 1999. Saskatchewan Agriculture and Food. Organic Saskatchewan Agriculture and Food Processing Organics. 2001. On-line. Internet. 1 Dec 2001. Available: http://www.agr.gov.sk.ca/docs/processing/organics/organic.asp Saskatchewan Agriculture and Food and Saskatchewan Organic Directorate. Production Statistics for Organic Agriculture in Saskatchewan for 2000. Report No. 2000-0202. February 2001. Saskatchewan Agriculture and Food website. www.agr.gov.sk.ca October, 2001. Schoney, Richard. Top Management for Farm Producers. University of Saskatchewan, Department of Economics. 1995 The Canada Thistle. Volume 1 [2] page 8. August/September 2000. University of Saskatchewan Division of Extension and Community Relations. Guide to Farm Practice in Saskatchewan. Saskatoon. 1984. USDA attache report. The Organic Food Market in Canada. Personal interviews with: Glen Neufeld, Sunrise Foods International, Saskatoon, SK. August, 2001. Ernie Holland, Seed Grower, Rocanville, SK. September, 2001. Warman Home Center, Warman, SK. October, 2001.
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MBR MicroBio Rhizogen, Saskatoon, SK. September, 2001. Prairie Pulse marketing division, Vanscoy, SK. September, 2001. Tamara, Kononoff, InfraReady marketing division, Saskatoon, SK. September, 2001. Tim Beard, Farm Gro Organic Mills, Regina, SK. September, 2001. Don Boyenko, CSP Foods, Saskatoon, SK. September, 2001. Con Agra, Saskatoon, SK. September, 2001. October, 2001. Cargill, Saskatoon, SK. September, 2001. September, 2001. Carol Husband, Husbands Foods, Wawota, SK. September, 2001.

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Appendix 1

Base Case Financial Model

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Appendix 2

Organic Commodity Pricing Schedules

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Appendix 3

Machinery Variable Cost Schedules

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Appendix 4

Fertilizer Applications

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